Bohanon: Youth Unemployment — How Bad Is It?

July 22, 2013

by Cecil Bohanon, Ph.D.

Recessions are always traumatic and recoveries always seem slow. This one is particularly hard on teens and young adults.

The most recent report indicates a national unemployment rate of 7.6 percent in June 2013. This is a welcome decline from the June 2009 rate of 9.5 percent. By means of comparison, the national unemployment rate in June 1982 (in the midst of the Volker recession) was 9.6 percent. It had declined to 7.2 percent four years later in June 1986.

The Indiana unemployment rate of 8.4 percent in June 2013 was down from 10.8 percent in June 2009. The Hoosier state’s unemployment rate was 11.6 percent in June 1982 and dropped to 6.7 percent by June 1986. This limited evidence suggests that Indiana’s employment rebound was stronger in the Reagan recovery of the 1980s than in the current Obama recovery. Don’t read too much into that, however, as any number of factors besides national policy impacts the way a state recovers from a national recession.

The data on teen and young adult unemployment are interesting. In June 2009, national unemployment among 16- to 19-year-olds was 24.7 percent. As of June 2013, it stands at 24.0 percent. So the teen unemployment rate has barely budged in four years as the general unemployment rate has declined by one fifth. In the 1980s recovery, the teen unemployment rate fell from 22.9 percent to 19.2 percent over the comparable four-year period.

A similar story holds in the national data for young adults ages 20-24 years. Their unemployment rate declined from 15.2 percent to 13.5 percent from June 2009 to June 2013. It declined in a much more dramatic fashion in the 1980s, though, from 14.6 percent in June 1982 to 10.6 percent in June 1986.

What explains the stubbornly high teen unemployment rate in this recovery? Between 1978 and 1981, the minimum wage was increased 45 percent from $2.30 to $3.35. Almost all the increase, however, was inflated away by a 39-percent increase in the general price level. Between 2006 and 2009, the minimum wage increased from $5.15 to $7.25, a 41 percent increase. Over this more recent time frame, however, the general price level only rose around 6 percent. A colleague of mine posts a picture of a gangly teenage boy with the caption: employable at $7.24 an hour, minimum wage $7.25 an hour. To the extent the law has mandated a one-third increase in the real price of unskilled teen workers, we should not be surprised that they are utilized less. The marginally expanding economy cannot overcome this burden. Despite the claim of some progressives, the overwhelming body of economic research confirms that real minimum-wage increases do decrease employment opportunities for teens. As David Neumark and William Wascher state in their book “Minimum Wage” (MIT Press, 2010, p. 6), “minimum wages reduce employment opportunities for less-skilled workers.”

As for recent college graduates, my casual observation is that students take a longer time finding suitable employment today than they did in the mid-eighties. A recent study offers some sobering statistics. In 1970, around 1 percent of all cab drivers had college degrees; more recently the percentage is 15 percent. In 1970, around 5 percent of all sales clerks in the retail trades had college degrees; the current percentage is around 25 percent. More and more college graduates eventually settle for jobs that do not require an undergraduate education. These graduates, however, spend a longer time searching for their “dream job” before they resign themselves to being a clerk at the local convenience store. Longer search times imply a larger pool of unemployed college graduates in monthly unemployment snapshots.

A final note: The average annual real GDP growth rate has been around 1.8 percent for the last nine quarters — 2011 to first quarter 2013. From 1984 to first quarter 1986, it was 4.7 percent. It would be interesting to see what would happen to the teen and young-adult unemployment rates if we could get ’80s-like growth in today’s economy.

Cecil Bohanon, Ph.D., an adjunct scholar with the Indiana Policy Review Foundation, is a professor of economics at Ball State University.

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